1/15/2009 @ 5:30PM

Muni Bond Default Parade Plays On

To look at current municipal default statistics, your first reaction might be that we have erroneously displayed the corporate defaults for 2008. However, 2008 would have been a record year even without Jefferson County, Ala., and its $3.8 billion sewer bond issue default. The town of Vallejo, Calif., added $280 million as it became the first municipal Chapter 9 bankruptcy in over a decade that affects bondholders.

Other notable 2008 defaults were the Las Vegas monorail issue ($451 million) and a $709 million issue whose only collateral was a gas supply agreement with
Lehman Brothers
, which filed bankruptcy six months after the deal was made.

While housing-related issues are always a principal source of defaults, at least in numbers, 2008 proved to be a bumper year, with 62 issues totaling $1.2 billion. That’s more than the total for all defaults in either of the last two years. The outlook for 2009 is for even worse to come, at least in terms of numbers of defaults.

The wave of defaults in housing-related issues in California and Florida can be expected to accelerate. Expect further defaults by small municipalities in California and elsewhere. Also vulnerable are sales tax dependent issues everywhere and “feel good” projects that depend on private or public support. The latter are vulnerable to the weak economy and, in the case of ethanol projects, a change in the underlying economics.

The federal government may well step in to provide indirect support to the states through municipal bond guarantees for issuers who otherwise couldn’t sell more debt, which may postpone into future years some of the grief building up. However, no such help will be coming for the thousands of bond issues backed by corporate sponsors or a home builder with empty lots and incomplete infrastructures.

Not helping is the cloud still hanging over the bond insurers. Their ability to provide coverage for new issues is in doubt, as is their ability to backstop deals previously insured and now in trouble. All in all, it looks like a busy year for this newsletter.

While municipal defaults broke all-time records in 2008, they pale in comparison to the massive volume of corporate defaults. The total of $157.56 billion easily broke the previous record year of 2002 when $107.9 billion in defaults was recorded, although that took 93 defaults. Setting aside the $127.5 billion contribution by the Lehmann Brothers default, the total for the year would still have made it the third largest year on record. While 2009 looks like it may challenge 2002 in terms of the number of defaults, we probably will not see a new dollar record even if
General Motors
files a pre-packaged bankruptcy.

Issues of Interest

Brown County, S.D., Solid Waste Facilities

Heartland Grain Fuels

Trustee:
Wells Fargo
Bank

This is the first of what may be a few ethanol projects that are finding tough going since gasoline prices fell. This $19 million project only got started in October 2007 and defaulted in October 2008. I guess the 8.25% coupon rate on the bonds had something to do with why someone would buy into a project whose viability is totally depended on government subsidies. Cusip: 115433AA2

Nevada Department of Business & Industry

Las Vegas Monorail

Trustee: Wells Fargo Bank

This oddly named $451 million bond issue has been in default since missing its January 2008 interest payments. The issue is insured by AMBAC for a portion that is being financed by periodic rollover–or was until the bond insurer lost its credit rating. The trustee has advised that debt reserves are adequate to fund the interest needs of the top-tier bonds through 2009 but that the lower tier bonds may miss payments from July 2009 onward. The issue financed the construction of a monorail that connects various casinos on the strip. Cusip: 25457VBB1